Wednesday, July 11, 2007

OPEC?

This poor piece on Slate applauds Sen. Herb Kohl, D-Wis bill which requires the Justice department to take on OPEC becauseOPEC is a cartel and cartels are illegal.

Kohl drafted a bill, dubbed "NOPEC," that said OPEC could no longer protect itself from antitrust prosecution by citing "sovereign immunity" and explicitly granted the Justice Department jurisdiction. The bill went nowhere back in 2000. But this past spring, Kohl dusted it off, and John Fialka reports in the July 6 Wall Street Journal that NOPEC has won the support of veto-proof majorities in the House and Senate. The appeal of NOPEC extends from left to right; House Speaker Nancy Pelosi, D-Calif., is pushing it, and so is the Heritage Foundation. The Bush administration, however, can't stand the idea.

The White House Office of Management and Budget says it opposes the NOPEC bill "adamantly." Perhaps this is because, as I've noted before, OPEC is just about the only international organization that President Bush has any regard for. (Shortly after taking office, Bush lectured a reporter about the importance of keeping oil prices "stable and predictable," even if that meant preventing a price drop.) Conceivably Bush is worried that busting OPEC might give Russia too free a hand in setting oil prices. (Russia is not an OPEC member, and its oil production now rivals, and may actually exceed, that of Saudi Arabia.) But busting OPEC would weaken two of Bush's least-favorite regimes, Iran and Venezuela. The Saudis wouldn't be happy, but neither would they be terribly impoverished, given the significant power they'd retain (as guardians of one-quarter of the world's proven oil reserves—about four times those of Russia) to affect prices. Diplomatically, busting OPEC strikes me as a wash at worst.

The thinking here is so wrong, it's hard to know where to start.

Firstly, OPEC has been a failure at setting prices, at least for the last 30 years. Like in any cartel, there is an incentive for each member to cheat, and no effective way to punish cheaters. And as predictably as the rising and setting of the sun, this has led (and will continue to lead) to OPEC members cheating on each other, producing more when prices are high, and thus bringing prices down. Therefore OPEC has no influence in setting oil prices, certainly as production in non-OPEC countries has risen--trying to "bust" it will have no impact on anything, and wastes taxpayer money. (Actually, this is an improvement from what Congress usually does, since it has zero impact).

Secondly, even if the Justice Department tried to break up OPEC, what would it do? Tell the Saudi government and the Iranian government to stop talking to each other? And if they refused, would an American judge tell them to go to a comfy prison in Brussels? I would actually like this to happen, because it would be funny.

As there is clearly no enforcement mechanism, it's reasonable to conclude that Sen. Herb Kohl, D-Wis is grandstanding because it will help him politically. So instead of calling a spade a spade, why does Slate's Timothy Noah applaud the effort?